Wanted: gutsy fraud fighters

An interview with Preet Bharara, U.S. Attorney for the Southern District of New York

May/June 2013

ByDick Carozza, CFE; Photos by Ken Gabrielson

Preet Bharara exhorts business school students, corporate employees and fraud examiners to create ethical cultures and have the courage to report fraud.

Preet Bharara would like to breed a little courage. He wants to catch more fraudsters, too, but he’d prefer to locate some gutsy, ethical fraud fighters.

When Bharara, U.S. Attorney for the Southern District of New York, speaks to business students in colleges and universities he’s not primarily aiming at would-be criminals. He’s speaking “to the vast majority … of people who are ethical and honest and want to do the right thing,” he says.

Bharara wants to convince these students to keep their ideals when they find themselves in companies that want to simmer the books a bit or pass some insider trading information. “For whatever reason — a lack of courage or a fear for their own jobs or a worry about being ostracized — many do not report fraud when they see it. They don’t speak up when they see something fishy going on. And that’s the central problem for anybody who cares about fighting fraud,” Bharara says during a recent interview with Fraud Magazine.

“In almost every instance of a massive fraud, you see detailed in the pages of the financial press that there were many, many, many people who were not part of the fraud necessarily but in some way enabled it by not sounding the alarm when there was an opportunity to do so,” Bharara says.

Bharara has spoken to students and faculty at Harvard Business School Stanford Business School, Yale School of Management, the Wharton School, Columbia Business School and many others.

“My sense is the business school community is getting much better at appreciating that they need to be indoctrinating folks not only in how to read a balance sheet and what economics is all about, but also making sure that they understand that it’s okay and appropriate and, in fact, necessary to think about ethical questions and to encourage students to create a culture at companies where people do the right thing, and if they see malfeasance to speak up and say something. I do think that businesses and business schools have a lot of room for improvement,” he says.

Bharara believes these “preemptive strikes” can deter fraud and shorten new frauds. Regardless, since he began his job on Aug. 13, 2009, he’s not waiting for whistleblowers (or sentinels as the ACFE calls them). As of press time, he’s had scores of convictions in a wide variety of cases including terrorism, fraud, cybercrime and public corruption — 71 for insider trading alone — and many more in the pipeline.

The spotlight always shines bright on the U.S. Attorney’s Office for the Southern District of New York, because its district includes Manhattan, the home of Wall Street, and its employees have gone on to be senators, congressmen, mayors of New York City, a governor of New York, a secretary of war, a secretary of homeland security, a secretary of state, an attorney general, a supreme court justice, ambassadors and federal judges.

So, when Bharara began a crackdown on insider trading in the wake of the Great Recession he and the office received worldwide media attention. The two most prominent convictions, so far, are Raj Rajaratnam, the billionaire investor who once ran one of the largest hedge funds — sentenced to 11 years — and Rajat Gupta, the retired head of the consulting firm McKinsey & Company and former Goldman Sachs board member — sentenced to two years.

TIME magazine named Bharara among The World’s 100 Most Influential People in 2012 and devoted a cover article to him. In 2012, he was included in Bloomberg Markets Magazine’s “50 Most Influential” list and Vanity Fair’s annual “New Establishment” list. And possibly the greatest honor of all: Bruce Springsteen, during an October 2012 concert, shouted, “This is for Preet Bharara!” before singing “Death to My Hometown.” (Bharara, a lifelong Springsteen fan, grew up in New Jersey after he and his family moved to the U.S. from India when he was a toddler. He’s a naturalized U.S. citizen.)

Bharara appreciates the honors, but he’s focused on deterring fraud and, beyond that, vigorously prosecuting it. “Any time you get to work at something for a cause that’s larger than yourself that’s also enormous fun, I think you’ve hit the clear jackpot,” he says.

FM: What are some of the principles and goals under which your office operates?

PB: This office operates under the same principles and goals that it has since its inception in 1789, which is to make sure at all times in every thing we do, we are acting responsibly and fairly, and that means to always do the right thing in the right way for the right reasons.

As I was taught, and as every generation of prosecutors in our office is taught, what is important is making sure that justice is done, and you’re not just notching victories in your belt. At all times we have to remember that we’re doing the public’s work. Our No. 1 priority is public safety, but we are also committed to ensuring that when people lose their money to fraud, that those responsible are prosecuted, and that the markets are fair. And in all the things we do, whether it’s violent crime, public corruption or fraud or terrorism or gun cases, we hold that principle paramount.

Prosecutors in our office have, as they do everywhere, an enormous amount of power and discretion, and we have to make sure we exercise it responsibly and wisely.

FM: TIME magazine in February of 2012 quoted you as saying, “Significant officials at publicly traded companies are casually and cavalierly engaged in insider trading.” Do you still feel that way?

PB: Insider-trading cases are still being brought, and we have more in the pipeline. It’s our hope that we’ve had a deterrent effect, and I think that’s borne out in some of the anecdotal evidence we have. Companies and funds are doing a better job of improving their internal controls and making sure they’re finding red flags. And they’re doing a better job ensuring that their employees know the consequences of engaging in this type of behavior.

Apart from that, employees are deterred from fraudulent behavior when they see people down the hall at work or those they’ve been to business school with hauled off in handcuffs. If they’re rational, they understand the cost, benefit and risk analyses, and they become less likely to want to throw away all their privilege and what they have garnered in their careers for a couple of extra bucks.

FM: It always seems rather ironic because most of these people are quite wealthy to begin with and just want those few extra bucks.

PB: In some cases it seems almost impossible to fathom when you have people who have gone to the best business schools, who have more privileges than virtually anyone living on the planet, and they’ve collected more income and wealth than you can possibly spend in a lifetime. And that they would risk their liberties for a few extra dollars by blatantly violating clear rules of the market. It’s a little bit hard to imagine, but it happens all the time. Our job is to make sure that people understand that it doesn’t matter how big you are, how connected you are or how wealthy you are — there’s a price to paid for engaging in fraud.

FM: The 2012 ACFE Report to the Nations says that occupational fraud is more likely to be detected by a tip than by any other method, and the majority of tips reporting fraud come from employees of the victim organization. Many of these tips, of course, come through anonymous company hotlines.

PB: I think that’s very important. First, there has to be a culture in which people who see something bad going on feel comfortable coming forward, and, second, people who are taking in the complaints have to be smart enough and care enough to do something about it. Sometimes you have the first, but you don’t have the second.

FM: That is the crux of the whole problem right there.

PB: If you could figure out how to solve that problem you could reduce the amount of fraud by many orders of magnitude! Look, it is one thing to hide a fraud for long periods of time from a government entity when the company isn’t subject to certain oversight authority or there isn’t a cooperator or whistleblower. It’s another thing to hide it from every single other individual who’s honest in the company. I try to say this when I speak to business people and business students who are educated and smart and have personal integrity. You think something fishy is going on? You’re probably right.

Too many people don’t investigate further, and those who investigate further don’t always feel comfortable coming forward for extrinsic reasons, and those who do come forward often find their words are falling on deaf ears because other folks don’t want to rock the boat by looking into it. But if you can just figure out a way to solve that problem and make people feel comfortable coming forward and make sure they’re not going to be punished, and they’re not going to be ostracized. And, in fact, they will be rewarded and applauded — and not criticized— if they find a substantial amount of fraud that will save the company money.

FM: CFEs know that intrinsically but just need to be encouraged to share that with their coworkers. In 1988, Dr. Joseph T. Wells, CFE, CPA, founded the ACFE with the tenet that it’s better to prevent and deter fraud than detect it. But CFEs sometimes feel alone in their mission to deter fraud.

PB: I agree with that. All this conversation we have about whistleblowing and people coming forward — I don’t suggest that it’s an easy thing, and it’s a panacea because we deal with whistleblowers in this office all the time. And we bring a lot of our cases based on complaints from whistleblowers either formally in a qui tam suit or otherwise. And they are to be applauded because it is not an easy thing to rock the boat particularly if you don’t have full job security. Unfortunately and tragically over time there are stories about what happens to people who speak against their companies even though it’s the right thing to do.

Those in the business world who say something in good faith ought to be applauded, heralded and emulated as opposed to being thrown under the bus.

FM: And unfortunately that still happens. Most of the whistleblowers I’ve met have paid a heavy price for being honest, but they’ve all said they wouldn’t do anything differently.

PB: If it were so easy for whistleblowers to come forward legislatures would not have tried to figure out how to incentivize them. But knowing how difficult it is to come forward, incentives to do so are included in both the False Claims Act and the Dodd-Frank statute.

FM: In October of 2012 you and federal prosecutors sued Bank of America for $1 billion and accused the bank of carrying out a mortgage fraud scheme. What were the reasons for not criminally prosecuting those entities and their executives?

PB: I’m not going to comment on cases that are still pending whether they’re civil or criminal. All I’ll say, as a general matter, is we bring the most aggressive and appropriate case we can based on what the law is and what the facts are, and a civil lawsuit does not necessarily preclude a criminal case; sometimes it takes longer to build a criminal case. But, obviously, the difference between a civil and a criminal case, among other things, is that in a criminal matter you have to prove guilt beyond a reasonable doubt to a unanimous jury, and that’s not always possible to do. You also have to show criminal intent in a way that’s different in another context. So, it depends on what the facts are in a particular case.

FM: As you know, there has been a lot of talk about why there haven’t been more criminal cases in the wake of the Great Recession. Do you think it is in many cases because as you say it’s a much different burden of proof?

PB: A lot of things happened in connection with the financial crisis at a lot of different institutions. I don’t think you can have one theory that explains the number of prosecutions that have been brought to date. What is important to appreciate is that folks in my office and many offices around the country have worked hard and continue to work hard to hold accountable either civilly or criminally those who deserve to be.

And there have been a number of cases that have been brought so far, and folks are still working on trying to bring additional cases. Sometimes it’s a failure of proof. Sometimes it’s because people have defenses that are impossible to overcome like opinions from their lawyers and from their accountants that everything they were doing was correct. Sometimes what we’re talking about was mere stupidity rather than something that was deliberately criminal. But before they’re prosecutors, the lawyers in my office are Americans, too, and suffered in the financial crisis just like everyone else did and have as much desire as anyone else to hold people responsible if they can be.

FM: Your office often uses unconventional tactics such as wiretaps and flipping lower-level defendants into informants. How did you decide that you would use wiretaps for your insider trading cases? Is this a throwback to your previous experience?

PB: That was an easy one for me because the decision to use wiretaps in insider trading cases was done by people in this office before I became U.S. attorney. When I got here we continued to use the practice where it was appropriate, and we defended the practice in district court and in the appeals court, and have used it in other cases as well. It doesn’t take a rocket scientist to appreciate when you’re talking about insider trading — which is a basic crime of communication — it helps to have that communication in real time on tape because it’s very persuasive to a court and a jury.

In all cases, the wiretap has to be done with a series of approvals within the Department of Justice and also the ongoing approval of a District Court judge. Apart from its usefulness as evidence in court, it provides a useful deterrent. And it is helpful if traders or people inside companies have to worry that the words they use on the telephones when they’re thinking about passing along insider information may be recorded and played back for a jury one day when their liberty is being decided upon. So apart from the convictions we get, the fact that using techniques like wiretaps makes it more likely that people will think twice or three times or four times before engaging in that type of conduct is a good thing.

FM: At what point did you realize that your talents suited you to be a prosecutor?

PB: I’m still trying to figure out if my talents actually suit me, but when I was fairly young I knew I wanted to be a lawyer in public service. When I was in my third year of law school I took a course in trial practice that was taught by then-District Court judge and future attorney general Michael Mukasey, and it was the most enjoyable class I had in my entire time in law school. I realized then for sure that the one thing I wanted to do was become an assistant U.S. Attorney because there’s nothing better than waking up every day and making sure that as a lawyer you’re not just doing what a particular client hopes for you to do whether or not you think it’s right, but that you are trying to do what is right for the public every day.

You never have to take a position that you don’t agree with or don’t think is just, and I don’t think there’s any higher calling than that. I have loved being a prosecutor every moment that I’ve been one.

I always thought that if I was going to become a lawyer, I wanted to be the kind of lawyer who shows up in court and argues in front of a jury. There’s no more exhilarating thing than that, just based on what it’s like to practice law at that high level. And finally, obviously, prosecutors have the ability to affect enormous amounts of change by protecting public safety, protecting people’s life savings and making their communities and country a little bit safer. If you can do that while also having fun, what could be better than that?

FM: You plan on staying in your position as long as possible?

PB: As long as those who are in the position to let me stay here, let me stay here.

FM: How can our members help you in the U.S. Attorney’s offices?

PB: If fraud examiners see something, they should say something. Meaning, if they are aware of wrongdoing and have not been heard internally, they should come to us. Sometimes it takes bringing in federal or local prosecutors or the FBI or the SEC or some other agency to get the full picture. And I wish the phones of prosecutors in my office rang more often from people who are inside places who see wrongdoing happening. It’s good for fraud examiners to develop relationships with prosecutors’ offices so they know what to look for and who to call when something seems legally suspect.

FM: What practical advice can you give our members to encourage them as they fight fraud in the trenches?

PB: Your members probably don’t need a lot of advice because they’ve already been smart to join the organization; they’re smart enough to do it because they think it’s a good way to make the world a little better. I won’t presume to tell them how to go about doing their daily job. But I would say something that goes back to what we previously discussed: If fraud examiners can figure out a way not just to find the fraud but help folks think about how to create a culture in places where fraud is not committed in the first place and when fraud begins to be committed that other people are strong enough and courageous enough to come forward and put a stop to it or raise a red flag, then I think everybody would be better off.

So if everyone thinks a little bit larger than what their daily job is, whether it’s a prosecutor or a fraud examiner, that everybody thinks a little more broadly about developing cultures where fraud doesn’t take root in the first place, I think we could save ourselves a lot of trouble.

FM: Work ourselves out of a job.

PB: I often joke about that. I would love to be out of the job of pursuing fraud. There are plenty of other kinds of prosecutions we have to deal with. Unfortunately, we’re not in danger of that kind of unemployment anytime in the immediate future.

Preet Bharara, U.S. Attorney for the Southern District of New York, outlines the case against this international crime ringdefrauding Medicare. (Photo by Todd Maisel/NY Daily News viaGetty Images)

Bharara made the fast, determined trip to the prosecutor’s office

At the age of 44, Preet Bharara has risen quickly through the prosecutor ranks. Called “Wall Street’s top cop” by the Financial Times, he manages an office of more than 220 Assistant U.S. Attorneys for the Southern District of New York, which covers Manhattan, the Bronx and six counties.

Bharara was born in 1968 in Firozpu, Punjab, India, to a Sikh father and a Hindu mother. According to “The Street Fighter,” the cover story in the Feb. 13, 2012, issue of TIME magazine, when Bharara was 2, his physician father brought the family to New Jersey via England. As he grew, Bharara developed a first-generation immigrant’s passion for the American way of government, according to the TIME article.

Bharara graduated magna cum laude from Harvard College with a Bachelor’s in Government in 1990 and from Columbia Law School with a law degree in 1993, where he was a member of the Columbia Law Review.

He was a litigation associate at two New York law firms from 1993 to 2000 and then fulfilled his dream of being an assistant prosecutor when he joined the Southern District. Bharara was assigned to the organized-crime unit and helped bust members of the Colombo and Gambino families using wiretaps.

In 2005, he served as chief counsel and staff director of the U.S. Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts. He helped to lead the Senate Judiciary Committee investigation of the firing of nine U.S. Attorneys by aides of then-Attorney General Alberto Gonzales.

New York Senator Charles Schumer then recommended Bharara to President Barack Obama to be the Southern District U.S. Attorney General. He was confirmed, and he began his job in August of 2009.

Though Bharara has gained notoriety from his high-profile insider-trading cases, he says his office’s main responsibility is investigating terrorism leads. He secured life sentences for Faisal Shahzad, the Times Square bomber, and for one of the Al Qaeda plotters of the 1998 bombings of two American embassies in East Africa. And his office recently indicted a Bin Laden associate who also served as his spokesperson.

The office also works on cyber crime, mortgage fraud, public corruption, gang violence, international narcotics trafficking and civil rights violations.

The office secured the guilty plea of Peter Madoff for his role in his brother Bernard’s Ponzi scheme that included an agreement to a 10-year sentence, the statutory maximum, and to forfeit all of his and his family’s assets. Together with Madoff trustee Irving Picard, the office also achieved the largest forfeiture in U.S. history — $7.2 billion from the estate of Jeffrey Picower.

Bharara is tackling large-scale, sophisticated financial frauds by creating the Complex Frauds Unit and the complementary Civil Frauds Unit. The Civil Frauds Unit has collected more than $500 million in settlements including multimillion-dollar settlements with Deutsche Bank and CitiMortgage for faulty lending practices and other fraudulent conduct.

The Complex Frauds Unit, which targets cyber crime and complex financial crime, among others, has prosecuted core members of the computer hacking groups, LulzSec and Anonymous. Together with the FBI, the office also recently announced the international takedown of 27 defendants allegedly engaged in the theft of personal identification information (PII) and other crimes over the Internet.

According to his office, the defendants allegedly were involved in “carding” crimes — offenses in which the Internet is used to traffic in and exploit the stolen credit card and bank account PII of hundreds of thousands of victims globally.

Preet Bharara leads a list of strong keynoters slated for the 24th Annual ACFE Global Fraud Conference June 23-28 at the ARIA Resort & Casino in Las Vegas. The conference brings together more than 2,400 anti-fraud professionals from around the world to discover the latest trends, techniques and resources in the fight against fraud.

The conference also will offer more than 70 sessions led by experienced practitioners in a wide array of fraud-related subjects including prevention, investigations, auditing, compliance and risk. Networking events, professional development offerings and the Anti-Fraud Exhibit Hall will provide additional opportunities for attendees to strengthen their abilities as fraud fighters.

*The ACFE does not compensate convicted fraudsters.

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